Transcript ppt 3 _ Elasticity of Demand

Today’s LEQ: How do you measure a
consumer’s responsiveness to a change in
price?
 Measures how much buyers and
sellers respond to changes in market
conditions
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Measures how willing buyers are willing/able
to change buying habits in response to a price
change
Makes discussion of demand quantitative:
How does a change in price impact quantity
demanded for a given good or service?
 For example, gas prices dropped to $3.00 per
gallon – how much will this change consumer
behavior?
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Demand for a g/s =
elastic if QD changes
substantially

Demand for a g/s =
inelastic if QD changes
slightly
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Your classmates will drop each item to the
ground from shoulder height. Which item
is the most elastic/inelastic and why?
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Volleyball
Basketball
Softball
Foam Ball
Football
Phrase your answer in terms of price and
quantity demanded.
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It’s been a while since Monday… Refresh your
memory by stringing together the terms
below into a statement that recaps what
you’ve learned about the elasticity of demand
thus far:
Responsiveness, price change, demand,
elasticity, inelastic, elastic
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No universal rule on determining elasticity –
too many social, economic, psychological
factors that come into play
4 general rules of thumb that can be helpful:
 Substitutability
 Proportion of Income Spent on Product
 Necessities vs. Luxuries
 Definition of the Market
 Time Horizon

Using your understanding of the determinants of
demand elasticity, rank the following g/s in order of
most elastic to least elastic. Be prepared to defend
your placement.
 Insulin
 Cigarettes
 Running Shoes
 Granny Smith Apples
 BMW convertible
 Gas
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There are two ways… simple and complicated
(we have to know both ways )
Simple way first:
 This will give you the elasticity coefficient – the
change in QD proportionate to the change in price
 Use absolute value (eliminate (-) or (+) sign)
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For example, suppose a 10% increase in the
price of an ice cream cone causes the amount
of ice cream you buy to fall by 20%. Calculate
the elasticity of demand using the simple
formula.
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For example, suppose a 20% increase in the
price of tacos causes the amount of tacos you
buy to fall by 5%. Calculate the elasticity of
demand using the simple formula.
Did the market demand for Snickers
seem to be elastic or inelastic? How do
you know?
 Were the Snicker Bars an inferior good
or normal good? How do you know?
 Which goods were complements or
substitutes? How do you know?
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Add to your notes as you watch. You will be
asked to revisit your brainstorming activity
after the video. Be prepared!
http://youtu.be/4oj_lnj6pXA